Revenue growth beats expectations
Britannia reported healthy 15.1% yoy growth in consolidated revenues at Rs17.7bn driven by ~10% volume growth and balance on account of product mix improvement and price hikes. All the four sub categories of Britannia - Cookies, Milk Bikis, Nutrichoice and Marie recorded double digit growth during the quarter. The company enjoys ~11% market share in the Glucose segment and plans to increase the same to ~13-14% in 2-3 years. The company has a very strong product pipeline and the management plans to launch several premium and mid segment products. Britannia has gained market share in creams segment in the past one year, but is still low compared to market share it enjoyed 4-5 years back. The company targets to build a strong creams portfolio and increase market share in this segment.

Lower advertising/staff cost fuel operating margins

Operating margins expanded by 60bps to 9.6% aided by ~175bps/80bps drop in advertising/staff cost. A sharp ~220bps increase in raw material cost on account of sharp increase in milk and edible oil prices restricted further margin expansion. With a favourable base, the management expects pressure on gross margin to reduce for next 2-3 quarters. In the near term, margin expansion is expected to be primarily from product mix improvement (the company plans to take price hikes to the extent of inflation minus cost efficiency), but, later margins will improve in line with market growth improvement. We expect the company to take little more price hikes to improve margins.

Cost analysis

As a % of net sales

Q1 FY15

Q1 FY14

bps yoy

Q4 FY14

bps qoq

Material costs

53.7

51.1

257

55.0

(132)

Purchase of goods

8.0

8.4

(36)

7.8

17

Personnel costs

3.8

4.5

(78)

3.4

40

Advertising cost

7.8

9.6

(175)

8.2

(42)

Other overheads

18.0

18.3

(28)

18.1

(9)

Source: Company, India Infoline Research

Net profit registers strong 27% yoy increase
Net profit for the quarter registered 27% yoy increase at Rs1.1bn (our expectation Rs1bn) led by strong revenue growth, improved operating efficiency and higher other income (Rs216mn against Rs142mn in Q1 FY14). Depreciation increased by 62.4% yoy to Rs318mn (due to adoption of the new Companies Act) there by restricting further earnings growth.

Recommend Buy
Britannia is the largest player in the fast growing biscuits category with a market share of over 30% with a strong portfolio of brands like – Tiger, 50:50, MarieGold, Good Day, Milk Bikis, Treat and NutriChoice. Britannia is focusing on premiumisation of its product portfolio. We believe things are turning better for Brtiannia, with sales growth back on track, premiumisation and cost rationalisation driving margins and subsidiaries turned profitable. Increase in competitive intensity, input cost inflation and slowdown in domestic volume growth are the key risks to our call. At the current market price of Rs1,136, the stock is trading at 23.7x FY16E EPS of Rs47.9. We forecast 20.5% EPS CAGR over the next two years and recommend Buy rating on the stock with a 9-month price target of Rs1,308.

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